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Here’s Who Pays the Bill for Apple’s Tax Avoidance

The flap over Apple’s (AAPL) corporate tax strategy might seem like a snoozer, until you consider who makes up the difference for Apple’s shrunken tax payments. That would be you, dear taxpayer.

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Apple is in the crosshairs as Congressional investigators claim the company used audacious accounting methods to avoid paying tax on at least $74 billion of income during the past three years. Apple did nothing illegal but it shifted money among various overseas entities in a way that essentially left billions in income under no nation’s jurisdiction. Senate Democrats initiated the investigation as legislators are beginning the spade work for what may ultimately be an ambitious effort to overhaul the entire U.S. tax code.

Apple is the latest poster child for a tax system many experts say is routinely abused by those with the means to hire tax lawyers and accountants able to fully exploit hundreds of loopholes. General Electric (GE), Microsoft (MSFT), Google (GOOG) and many other companies have faced similar charges. The real problem isn’t any one company’s tax strategists, however, but lawmakers who have shredded the tax code into a leaky mess.

The victims

The victims, meanwhile, are ordinary taxpayers who fund most of the federal government. During the 1950s, individual income taxes typically accounted for about 60% of the government’s tax revenue, with corporate taxes covering the other 40 percent. By 1970 individuals paid 73% of all taxes. By 1990 it was 83 percent, with the peak coming in 2009, when corporations claimed steep losses and individuals paid 87% of all taxes. By 2012, that had drifted down to 82%, with corporations paying 18%.

Despite that shrinking share of the nation’s tax payments, the business lobby routinely claims taxes on U.S. corporations are too high because the official federal tax rate of 35 percent exceeds the rate in every other developed nation. But after credits and deductions, most U.S. companies pay an effective tax rate that’s considerably lower, ranging from 23 to 35 percent.

Some large U.S. multinationals are able to lower their taxes further by moving money among divisions based in different countries, to take advantage of the lowest tax rates. A 2011 New York Times story explained how GE earned a $14.2 billion profit in 2010 yet paid no federal income tax in the United States. Companies such as Apple that sell software or other types of intellectual property can take advantage of other loopholes that allow wide latitude for where they claim profits, and therefore pay taxes.

The corporate tax burden began to decline as a share of the nation’s total at a time when most taxes were falling. Tax reform in 1986 helped streamline the tax code, and a strong economy during the 1990s brought in more tax revenue with lower rates, leaving Washington flush. But that’s obviously not the case anymore. Since 2001, the national debt has exploded from $5.8 trillion to $17 trillion, with gaping annual deficits as far as the eye can see.

The real battle

The real battle over tax reform is going to be focused on who will pay the future taxes necessary to hack the national debt down to a manageable size. Many companies, including Apple (which still paid $6 billion in federal taxes in 2012 and claims to be the single largest U.S. taxpayer), say they’d welcome tax reform that closes loopholes, as long as it also lowers rates and more or less leaves nobody paying more in actual tax. The idea is that even a zero-sum outcome would be worthwhile if it simplified the whole process, lowered compliance costs and generated more confidence in the fairness of the system.

A lower corporate tax rate might also encourage big companies to move cash from overseas accounts back to the United States, perhaps boosting investment here. That’s why President Obama and some Democrats favor the idea, along with most Republicans.

But virtually no company favors tax reform that would raise the overall tax burden on corporations. And corporations tend to have the upper hand these days, since jobs are scarce and multinationals can threaten to move more work — and positions — overseas. That has already produced a kind of economic warfare among states, as low-tax places such as Texas aggressively woo companies from the northeast and other high-tax locales.

So if corporate America — ably represented by the best lobbyists in Washington — gets its way, somebody else will have to pay the future taxes needed to bail the government out of its massive debt load. We got a preview of how that’s likely to go earlier this year, when legislators resolved the “fiscal cliff” by raising taxes on the wealthy and ending a temporary cut in the payroll tax, effectively giving a tax increase to everybody who gets a paycheck. And this barely dented the national debt. America needs innovative companies such as Apple but the innovation should stop at the tax department.

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